By Steven K. Beckner
(MaceNews) – In a sign that misgivings may be spreading among Federal Reserve officials about the consequences of the Fed’s ultra-easy monetary policy, Kansas City Federal Reserve Bank President Esther George voiced concern about potentially “persistent” inflation pressures and said the Fed must be prepared to be more “flexible” and “nimble” in its monetary responses than its recent statements imply.
Since adopting a new policy “framework” last August, the Fed’s policy-making Federal Open Market Committee has adopted an aggressive, long-range policy to achieve a redefined goal of “maximum employment “ – one that is “broad and inclusive.” And, in pursuing that goal and its 2% average inflation objective, it has sought explicitly to let inflation exceed that level “for some time.”
George, speaking to her Bank’s 2021 Agricultural Symposium, sounded less sure than many of her Fed colleagues that rising inflation is “transitory” as she pointed to the 4.3% year-over-year April upsurge in consumer prices.
“What the current pace of inflation means for the inflation outlook for the medium term is less than clear,” she said.
George agreed that “many factors that have boosted current inflation seem likely to fade over time.”
However, she said, “a normalization of prices depressed by the pandemic doesn’t tell the whole story…. Other sectors have seen prices jump far above pre-pandemic levels as supply constraints have developed against a backdrop of robust demand….”
And she cautioned, “Expecting these price pressures to ease… does not ignore the potential for more persistent inflation pressures.”
“Over the long-term, the outlook for inflation is influenced by demand that is sufficiently strong across a wide range of goods and services that it pushes the overall economy up against its productive capacity,” she said. “In the near-term, it can be difficult to distinguish between a string of seemingly idiosyncratic bottlenecks and a broader-based lack of capacity.”
But George warned, “In the end, the persistence of any step up in inflation will ultimately depend on the pricing behavior of firms and workers, which in turn will be importantly affected by expectations for future inflation.”
On the employment front, she said she expects “strong employment growth in the coming months,” while recognizing that there is still an 8.2 million shortfall in non-farm payrolls from pre-pandemic levels.
The FOMC majority, which does not include her this year as a non-voter, has continually asserted the need to maintain a highly accomodative monetary policy to support an economy that is still “far” from Fed goals.
Thus, at its April 27-28 meeting, the FOMC reaffirmed plans to keep the federal funds rate in a zero to 25 point target range “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” The median projection in the April “dot plot” was for the funds rate to stay near zero thrugh 2023.
What’s more, the FOMC reiterated it will keep buying $120 billion of bonds per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
However, George seemed to outline a less determinedly accommodative approach.
“As the economy works its way towards a new equilibrium, policymakers will be well served to take a flexible approach to monetary policy decisions, in my view,” she said, adding that the fed’s revised policy strategy should be considered “a ‘framework,’ rather than a ‘rule.’”
The FOMC’s new framework “isnot a precise prescription for policy action even as it repositions the Federal Reserve’s approach to achieving its congressional mandates for employment and inflation,” she continued.
“The structure of the economy changes over time, and it will be important to adapt to new circumstances rather than adhere to a rigid formulation of policy reactions,” she went on. “With a tremendous amount of fiscal stimulus flowing through the economy, the landscape could unfold quite differently than the one that shaped the thinking around the revised monetary policy framework.”
“That suggests remaining nimble and attentive to these dynamics will be important as we seek to achieve our policy objectives in the context of sustainable economic growth and the well-being of the American public,” George added.